Insights

European Union Countries Agree to Terminate Intra-union Bilateral Investment Treaties

Firm Thought Leadership

In a series of three declarations issued on 15 and 16 January 2019, the Member States of the European Union (the “EU”) announced their agreement to terminate their so-called Intra-EU bilateral investment treaties (“BITs”). The announcement follows the March 2018 decision of the Court of Justice of the EU (the “CJEU”) in Case C-284/16, Achmea v Slovak Republic (the “Achmea Decision”) that the investment arbitration mechanism of the Netherlands-Slovakia BIT prevents disputes over the application or interpretation of EU law from being decided by courts within the judicial system of the EU and therefore violates EU law.

Background

The Member States of what is now the EU were pioneers in the use of BITs, with Germany concluding the first such treaty with Pakistan in 1959. Starting in the 1980s, they concluded BITs with non-Member States, particularly “Eastern Bloc” States, to protect future investments. Starting from 2004, the EU expanded to encompass former Eastern Bloc States, with the result that all parties to those BITs became EU Member States (hence the term “Intra-EU” BITs). In addition, EU Member States (and the EU itself) are parties to the Energy Charter Treaty (the “ECT”), which came into force on 16 April 1998. This multilateral treaty contains rights for investors normally found in BITs, including the right for EU investors to initiate intra-EU arbitration proceedings against EU Member States.

Some questioned whether the Intra-EU BITs remained compatible with EU law as it has evolved in recent years. In particular, the European Commission voiced its opposition to maintaining the Intra-EU BITs in amicus curiae briefs submitted to investment tribunals and in filings to ICSID annulment committees and national courts in enforcement proceedings. Arbitral tribunals, however, continued to accept jurisdiction over disputes under these treaties.

The Achmea Decision

The tide turned on 6 March 2018, when the CJEU found the arbitration clause in the Netherlands-Slovakia BIT incompatible with EU law in the Achmea Decision.

In 2007, Slovakia forbade the distribution of profits generated by private health insurance activities. Achmea, a Dutch investor in Slovakia, claimed this action violated the Netherlands-Slovakia BIT. An arbitral tribunal found for Achmea and awarded damages of EUR 22.1 million. Slovakia then brought an action to set aside the final award at the seat of the arbitration in Germany. Among other arguments, Slovakia maintained that both the final award and the BIT itself were contrary to public policy by violating several provisions of EU law. The court of first instance dismissed the action. Slovakia appealed to the German Federal Court of Justice, which, in turn, referred the case for a preliminary ruling to the CJEU.

The CJEU held that the application of the investor-state dispute settlement (“ISDS”) provision in Article 8 of the Netherlands-Slovakia BIT was incompatible with EU law. The CJEU held that the ISDS provision allowed for the interpretation and application of EU law by arbitral tribunals, which are neither Member State courts nor subject to review by such courts in a way that ensures the uniform application of EU law (e.g., by using the procedure for a CJEU preliminary ruling, provided for in EU treaties).

Aftermath

On 15 and 16 January 2019, EU Member States announced their agreement to terminate the Intra-EU BITs. In a series of three declarations, EU Member States declared that the Achmea Decision rendered inapplicable: a) Intra-EU BIT rights; b) consent to arbitrate in the ISDS provisions of Intra-EU BITs, with a consequent lack of jurisdiction for arbitral tribunals; and c) sunset clauses regarding the early termination of BITs.

They agreed, among other aspects, to:

  • Inform tribunals in all pending Intra-EU BIT arbitrations about the legal consequences of the Achmea Decision;
  • Request courts, including in third countries, to set Intra-EU BIT awards aside or not to enforce them due to a lack of valid consent;
  • Inform investors that no new Intra-EU BIT arbitration should be initiated;
  • Terminate all Intra-EU BITs, either by means of a plurilateral treaty or of bilateral treaties and deposit instruments of ratification of such treaties no later than 6 December 2019; and
  • Discuss practical arrangements to address settlements and Intra-EU awards that can no longer be annulled or set aside and were complied with or enforced before the Achmea Decision.

EU Member States appeared to disagree on the legal consequences of the Achmea Decision for the intra-EU application of the ECT. On 15 January 2019, most Member States agreed to discuss this issue with the European Commission. However, on 16 January 2019, Finland, Luxembourg, Malta, Slovenia, Sweden made declarations in almost identical terms with those issued by the Member States the day before but with no mention of the ECT specifically. Hungary made a similar declaration in which it noted that the Achmea Decision is silent on the ISDS clause of the ECT.

Discussion

Those who made or hold investments in the EU through non-EU subsidiaries are unlikely to be affected by these developments. However, all investors, including investors with investments subject to Intra-EU BITs should carefully review their arrangements and any applicable BITs.

Termination of Intra-EU BITs – Sunset clauses. While the full impact of the EU Member States’ announcement will not be known for some time, investors should expect Intra-EU BITs to be terminated imminently. They should not count on continued protection after termination under Intra-EU BIT “sunset clauses”. Sunset clauses generally protect investments in case of unilateral termination, but there is no agreement that such protection is available in cases of termination by mutual consent. Moreover, EU Member States may follow the approach the Czech Republic employed in 2012, whereby agreements to terminate Intra-EU BITs expressly provide that the sunset clause shall not apply. Non-EU Members have also followed this approach (e.g., in terminating the Argentina-Indonesia BIT in 2015).

Intra-EU application of the ECT. The continued application of the ECT to Intra-EU claims is uncertain, particularly considering the apparent disagreement between EU Member States on this point. Some states have already voiced their opposition to ISDS under the ECT. For example, Spain, a frequent ECT respondent, asked a Swedish Court of Appeal for a preliminary reference to the CJEU on the issue as part of its efforts to resist enforcement of the ECT award in Novenergia II v. Spain, arising from its reforms of the renewable energy industry. Investors should expect opposition from Member States and from the European Commission, which considers the ECT as inapplicable to Intra-EU investments. No arbitral tribunal that has considered this issue has yet declined jurisdiction (see, e.g., decisions on jurisdiction in Vattenfall AB et al v Germany, (ICSID Case No. ARB/12/12) and Electrabel S.A. v. Hungary (ICSID Case No. ARB/07/19), as well as the awards in Blusun S.A. et al v. Italy (ICSID Case No. ARB/14/3); Novenergia II and anor v. Spain (SCC Arbitration 2015/063); Eiser Infrastrcuture Ltd and anor v. Spain (ICSID Case No. ARB/13/36); and Charanne B.V. and anor v. Spain (SCC Arbitration 062/2012)).

Nonetheless, potential claimants should anticipate intervention by the European Commission before arbitral tribunals, objections to jurisdiction and opposition to certain rights of compensation afforded to Intra-EU investments under the ECT (e.g., those the European Commission considers illegal state aid under EU treaties). Likewise, they should expect attempts to deny recognition and to annul Intra-EU BIT/ECT awards within the EU, notably through EU Member State courts. It may then be difficult or impossible to enforce an Intra-EU BIT arbitration award outside of the EU under the provisions of the New York Convention if the award is set aside in the seat of arbitration.

Enforcement may still be possible outside the EU, however.

Structure of investments. Investors should consider ways of restructuring Intra-EU investments to mitigate the impact of termination of the Intra-EU BITs and opposition to the ECT, such as by inserting an investment vehicle constituted in a non-EU State with a BIT in place. This process may require assistance of counsel since: a) restructuring may have tax consequences; and b) investment treaties may impose discrete requirements to attain protection under the treaty (e.g., the requirement in some BITs that an investor company has “real economic activity” in the place of incorporation).

To avoid allegations of abuse of process before an arbitral tribunal, any restructuring should occur before a dispute arises.

New arbitrations. To lessen the risk of intervention by the court of the seat of the arbitration, investors should consider arbitration under the ICSID Convention, if available. Arbitrations under the ICSID Convention (not to be confused with ICSID “Additional Facility” arbitrations) are not linked to a seat or legal place of arbitration. All aspects of the proceeding are governed by the Convention and are thus “self-contained”. All ICSID Convention Member States have a duty to enforce ICSID awards and may only set them aside in the manner specified in the convention (i.e., before an ICSID ad hoc Committee). As ICSID is attached to the World Bank, it exceeds the ambit of the EU and of EU law.

Enforcement issues. In light of Member States’ agreement and of post-Achmea EU law, potential claimants should expect EU Member States not to comply with Intra-EU BIT/ECT awards within the EU. They should consider strategies for enforcement of any future award outside of the EU. As with the initiation of new proceedings, ICSID Convention arbitration could enhance the prospect of recovery. Here again, however, caution is warranted since the European Commission has opposed payment of awards such as the recent EUR 178 million Micula v. Romania Intra-EU BIT, ICSID award as illegal state aid under EU law. Courts in Belgium, Sweden and the UK have declined or stayed enforcement as a result; US courts have not done so at present (see Micula et al v. Gov’t of Romania, Civil Action No. 17 CV 2332 (D.C.)).

 

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